Step-up Basis

What is the “step-up in basis” rule?

In general, when you sell an asset that has risen in value, you pay taxes on the gain. For assets like stocks, the “capital gain” is generally calculated as the difference between the purchase and sale price.

For example, if you buy shares in a company for $100 and sell them for $300, you have $200 in capital gain. The original purchase price, $100, is called your “basis” in the shares.

But there is a special rule for inherited property. Here’s how it works: If you inherit a stock from your late aunt and later sell it, you are taxed on the difference between what you sold it for and what the stock was worth when Auntie died.

Let’s say Auntie bought the stock a long time ago for $1,000 and its value climbed to $50,000 during her lifetime. When you inherit the stock, your “basis” is the stock’s fair-market value upon Auntie’s death, or $50,000, rather than the $1,000 she paid for it.

That step-up in basis means that when you sell the stock now, you’ll only pay taxes on any gain above $50,000 that occurred while you held the stock.

Since Auntie held the stock until she passed away, she never “realized” the $49,000 in gain, and therefore never paid taxes on it either. So the step-up in basis rule means that $49,000 goes permanently un-taxed. We’ve used company stock as an example here but the step-up in basis occurs with other appreciated assets, such as real estate or closely held businesses, that are passed from one generation to the next.

The result is that hundreds of billions of dollars in income go entirely un-taxed every year.1 Under current Tax Law, when someone passes away their Capital Gain Property, real estate, stocks and other, bases is the value on date of Decedent’s death.

Under the Proposed Tax Law, the beneficiary of this property would have the Carryover Basis, or have the same cost as the decedent. One 1998 study has shown that if capital gains were taxed resulting from the above Carryover rule, that 84% of all capital gains would be result from sale of property that was acquired from a decedent.

This is a hot topic in politics now, even though politicians avoid speaking about it. We expect that you will hear more about this topic in the near future. Please make sure your Estate Plan has taken into account possible changes/scenarios in the STEP-UP in basis rules.

By: Phillip R Wasserman

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